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Kraft Foods Group (KRFT) reported what we view as a strong 1Q13 EPS performance with [diluted] EPS of $0.76, coming in a full $0.10 over our estimate and $0.12 above the consensus estimate.

1Q13 revenue growth of 2.1% on an organic basis was in line with our expectations but the company’s very diligent cost control (overhead, productivity, etc.) continues to support robust operating-profit growth and operating-margin expansion. Operating profit was up 9% in the quarter and up 17% on an underlying basis, speaking to the power of these cost-reduction activities.

We look to a strong gross margin improvement as the key to providing the flexibility for the company to continue to spend aggressively on marketing and R&D/new products.

We continue with our Buy rating and $55 target price. This quarter features an improving underlying sales performance that we believe provides some upside potential for earnings across the remainder of the year.

Kraft Foods Group reported 1Q13 [basic] EPS of $0.77 compared to consensus $0.64 and our $0.65 estimate. Net sales increased 2.1% year over year vs. our 0.6% estimate, exceeding our estimate by $0.08 per share, net. Gross profit increased 4% year over year and beat our forecast by $0.05, while EBITDA increased 11% and beat by $0.12. The tax rate was favorable by a net $0.02 per share compared to our forecasts. FY13 guidance was unchanged for… $2.75 in GAAP EPS. We raise our FY13 EPS estimate to $2.77 from $2.76.

Free cash flow visibility is improving. CEO Tony Vernon and team are centered on the most important metrics—volume, cash flow, and ad[vertising] spend—that we believe support an outlook of superior earnings visibility, reinforced by realigned compensation plans. With Q1, management is off to a good start, having delivered strong cash flow ($147 million vs. -$183 million last year), volume, and ad spend (double-digits percent year over year ), which together suggest improving visibility to FY13 free-cash-flow guidance (at least $1 billion).

We maintain our position that the domestic-grocery operations possess sizable competitive advantages, including a solid brand portfolio (Kraft, Oscar Mayer, and Maxwell House each generate more than $1 billion in annual sales) and substantial economies of scale in North America (with more than $18 billion in annual sales)—which drive our narrow economic moat rating.

Longer term, we expect annual sales growth of 3–4%, even given its exclusive focus on North America…

While we recognize that the shares aren’t a steal at current levels (17 times our fiscal 2014 earnings per share estimate), we still think the stock is somewhat attractive relative to other packaged-food names, which trade in excess of 18-19 times forward earnings, particularly in light of the robust dividend that the company pays, which is yielding around 4% annually.

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